Financial Statement Gymnastics, Pt. 6

John Cornyn

FINANCIAL STATEMENT GYMNASTICS

It is one thing to be asked to benchmark your financial results; it is another to be able to do so on a moment’s notice.

This is the sixth and final column on the subject of financial statements and the issues involved in comparing operations that use different systems to account for their revenues and costs.

In the earlier articles, we briefly discussed the various ways revenues are recognized in operating statements, as well as the manner in which food, labor, and other expenses are treated.

In this final column, it is worth recalling why we explored this topic in the first place. That is, to help FSDs more effectively answer the question so often posed by their administrations–"How is our foodservice doing when compared to others in our industry?"

The underlying premise has been that macro comparisons which use so-called industry averages or peer benchmarks, while easy to obtain, far too often do not tell the whole story. In some cases they can be misleading to the extreme and lead to ill-advised decisions.

While most administrators readily acknowledge the need to compare "apples to apples" and "quince to quince," that job is exacerbated by the fact that few institutional accounting systems are really designed to permit easy comparisons of foodservice operations.

Real solutions to this problem are never simple. The need to provide a financial justification often surfaces suddenly, in the midst of budget planning or in the course of a change of administrations, when there isn’t sufficient time to assemble the data needed.

In some cases it may be necessary to retain an objective third party to either prepare or review/endorse your comparison methodology in order to gain further credibility. This can be especially true if senior management will wholly or partially predicate major decisions regarding the food service program on the data presented.

That said, here are some recommendations for those who want to be better prepared for the inevitable request for a benchmarking comparison.

Adopt a common financial and operational nomenclature, and "standard" statement model. The foodservice industry standard most commonly adapted is the Uniform System of Accounts for Restaurants published by the National Restaurant Association. Understandably, it is designed for commercial restaurants, so some modifications are required. Another alternative is to work with your foodservice industry trade group to develop a model specifically adapted to your segment (such as the one developed for college operations by NACUFS).

Be open to adopting a "wide-open," second set of books. Most organizations employ an accounting system which is poorly adapted for recognizing auxiliary revenues and other quirks of a particular onsite foodservice business. A well thought out "second" set of books can help you capture and organize all relevant revenues and expenses in a format which can then be used for fair comparison purposes.

Be proactive in collecting valid benchmark comparison numbers from as many sources as possible. The key is do your homework up front, by seeking out those food service programs which are comparable in type, size, number of meals, service levels, hours of operation, location (urban vs. suburban vs. rural) and other variables. Ideally, those participating will share their methodologies for recognizing revenues and assigning direct and indirect expenses.

On at least an annual basis, prepare a second financial statement using the model you’ve chosen. It is critically important that you prepare a detailed introduction with as many footnotes as necessary to explain the rationale used to compile your numbers.

Don’t be afraid to dwell on the obvious. For example: "Labor costs are influenced by institutional wages and salaries which are X% higher than the local market (or a peer institution)"; or, "the benefits package (including the number of ‘nonproductive’ days) is substantially better than others found in our region."

Prepare your own pro forma comparisons. Line up your numbers against those provided by the peers you have found to be most comparable. Prepare two spreadsheets, with the first showing all of the comparisons, and the second, just those used for the final analysis.

Once again, make sure that there are detailed notes to explain significant variances. It is important to help senior management understand both the research done and the methodology used to present revenues and expenses in a logical way.

Use charts and graphs to summarize key data and to illustrate the "big picture." A chart can easily be worth a thousand words.

Given a typical director’s day-to-day and special assignment challenges, it can be frustrating to contemplate this kind of an exercise. At the same time, this could truly be a case where an ounce of prevention is worth a pound of cure. Just file your paperwork and spreadsheets under "Financial Statement Gymnastics."

John Cornyn is a principal with the Cornyn Fasano Group, a foodservice management consulting firm located in Portland, Oregon. He and his partner, Joyce Fasano, coauthored the book Noncommercial Foodservice: An Administrator’s Handbook.